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Medusa Mining Buy at 300p – target 400p

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London and Australia-listed, Philippines-focused gold producer Medusa Mining (LSE:MML) is a top multi-bagging recommendation from my past life at t1ps and I commented that I again thought the shares were cheap in an article last month. Following recent interim results, the following is my current take…

Click here to read my article of last month

The results showed that Medusa generated a net $54.86 million from operating activities for the six months ended 31st December 2012 as it sold 43,492 ounces of gold at an average of $1,676 per ounce, compared to a cash cost of $300 per ounce. After particularly $48.92 million of capital, development and exploration spending, cash (net) at period end totalled $8.83 million, with net current assets $45.92 million and non-current liabilities totalling just $0.793 million.

The company’s producing Co-O mine has been pre-dominantly in development mode since July 2011 to prepare for future production increases and the latest half year saw gold production of 32,580 ounces. This was lower than originally expected as a fire and some inclement weather impacted on mining activities and mill throughput and production of between 80,000 to 90,000 ounces for the year is now expected at an anticipated cash cost of approximately $250 per ounce.

Exploration success has though seen resource at Co-O pass 2 million ounces for the first time and next year 200,000 ounces of production from the mine is anticipated, with the company’s production increasing by a further 200,000 ounces two years later as the Bananghilig deposit is brought on-stream. However, the progress to these goals is evidently not cheap and material spending remains – with diamond drilling focused on extending the Co-O Vein system continuing, an additional programme of 14 infill holes recently commenced at Bananghilig to convert additional resources to the Indicated Resource category and Co-O “planned infrastructure in progress includes new junior staff quarters at the mill, a new maintenance workshop for trucks and heavy equipment, expansion of the mine-and-mill laboratory and the construction of a new laboratory specifically for exploration samples”. As a result, and with the gold price moving lower over recent months, Medusa “has temporarily suspended the payment of any dividend for the current fiscal year”. However, the working capital position looks to remain healthy enough and the company’s low cost of production means its output continues to generate prodigious positive cash flows for it.

I updated my view on the company in a piece following its 30th January released ‘quarterly activities report’, with the shares then at 327.25p – to read that update click HERE

The shares have since fallen to around 300p but my view remains that, whilst an investment here has a clear speculative element – particularly with potential new Philippines mining legislation – and the recent guidance downgrade is certainly not any help to investor sentiment towards the stock, there is likely to be material upside from around current share price levels on the company delivering on its future projections. I continue to believe a 400p+ share price warranted.

Over 12 years running t1ps.com with Steve Moore Tom Winnifrith delivered an average gain per tip of 42.7% over 241 tips. Tom and Steve now edit the Nifty Fifty website and will be serving up a new high yield tip tomorrow (Friday 1st March). For more details click HERE

Tom and Steve are among 25 speakers at the UK’s top investor show UKInvestorShow.com on April 13th. Headline speakers include Nigel Wray, Mark Slater, Evil Knievil and Nick Leslau. For details of the full speaker line up and of the 80 companies attending go to www.UKinvestorshow.com

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